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What SEC’s Proposal “Pay For Performance” Means For Companies Going Forward

Publisher: Forbes
Author: Robin Ferracone

Finally, after five years of waiting, the SEC© issued new rules a few weeks go on the link between pay and performance disclosure.

The rules, which are in accordance with Section 953(a) of Dodd-Frank, will require companies to disclose the relationship between compensation “actually” paid to executives and the financial performance of the company measured by total shareholder return (TSR). My colleagues at Farient and I took a closer look at the SEC’s pending pay for performance rule to determine whether these rules are reasonable and what they’ll mean for companies going forward.

The Rules At A Glance

The rule is designed to provide greater transparency and to better inform shareholders voting on the executive compensation plans. The rules require:

  1. An additional table in the proxy report, which includes data on compensation and company performance
  2. An explanation of the data in either a narrative and/or graphical format

Specifically, the table must show compensation data for the CEO and an average for all other NEOs. For the first year the rule is in effect, the SEC© will require three years of data; in the second year, four years of data; in the third year and five years of data. Finally, the disclosure must reflect the amount of compensation the CEO and NEOs are “actually” paid.

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